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Spotlight
Significant changes are afoot for permanently endowed
charities. The Trusts (Capital and Income) Bill recently introduced
in the House of Lords will, for the first time, give trustees with
permanent endowment who wish to invest on a total return
basis, a statutory power to operate without the usual restrictions
on capital expenditure. Trustees can adopt the provisions by
resolution, subject to compliance with regulations to be made
by the Charity Commission.
At present, trustees of charities with permanent endowment
can only operate a total return approach to investment and
distribution of returns if they have a Charity Commission total
return order. The Commission’s orders are somewhat complex
in operation and have not proved to be a universal solution to
the problems of total return investment. The Law Commission
therefore proposed a new statutory total return regime for
permanently endowed charities and it is these proposals that
are now reflected in the Bill. Whilst much will depend on what is
in the Commission’s regulations, the proposals in the Bill appear
to offer a more satisfactory framework.
In summary, the key features of the Bill are:
◆◆ trustees must adopt the new statutory total return provisions
by resolution, subject to their being satisfied that it is in the
interests of the charity to do so;
◆◆ no Charity Commission Order or consent is required;
◆◆ the permanent endowment funds will be freed from the
restrictions otherwise applying to them on expenditure of
capital but the trustees are bound instead by regulations that
are to be made by the Charity Commission;
◆◆ the statutory provisions may be adopted for the whole or part
of the endowment fund concerned and charities can adopt
the new provisions in relation to some, but not all, of their
separate endowment funds if they think this appropriate –
separate consideration and separate resolutions will be needed
for each fund;
◆◆ the statutory provisions enable a power of accumulation to be
conferred, to allow unapplied return to be added to the capital
of the fund;
◆◆ a charity’s existing Charity Commission total return orders will
cease to have effect if it adopts the new powers.
The Charity Commission is given power to make regulations in
particular covering:
◆◆ the resolutions the trustees must make (including steps to
be taken before passing a resolution), possible termination or
variation of resolutions and requirements for notification of
resolutions to the Commission;
◆◆ the investment and expenditure of the fund, including
requirements to maintain the long-term value of the funds
concerned, requirements to obtain advice and in relation to
the operation of the power of accumulation. In some cases,
expenditure will still require the Commission’s consent. This
will no doubt be required for major expenditure of a “capital”
nature which could not be said to reflect a standard annual
distribution of return and may affect the long-term value of
the fund. Regulations will also cover accounting/reporting
requirements; and
◆◆ steps to be taken if the resolution ceases to have effect.
Permanent endowment changes
Working with the Not-for-Profit Sector Spring 2012
CONTENTS
1–2 Permanent endowment changes
2 New European charity vehicle proposed
3 Client Focus – The Royal Society
3–4 HMRC extends own definition of charity to all tax reliefs
4–5 News in brief
s
There is no clear indication as yet when the Bill will progress and
become law. Even when it does, the Charity Commission will be
required to follow the usual three month consultation on its
guidance. It is likely therefore that the new provisions will not
be available for several months.
However, it appears, that once introduced, the proposed new
statutory provisions will offer a more satisfactory solution
to the dilemma of total return investment for permanently
endowed charities.
If you have any questions regarding anything raised in this
article, please contact Ann Phillips on [email protected]
or 0207 324 1740
Ann Phillips Partner [email protected]
s
New European charity vehicle proposedOn 8 February 2011, the European Commission published the
“European Foundation Statute” – a proposal for a Regulation to
introduce a new legal entity known as a “European Foundation”
for public benefit purpose entities (also known as charities)
across the European Union.
The aim of this legislation is to create a new legal structure for
charities that operate in more than one Member State, with the
intention of harmonising the treatment of those organisations,
and donations to them.
Charities who already work in more than one Member State
will be well aware of the complexities involved – particularly
having to meet different registration conditions in different
jurisdictions to obtain the often favourable tax treatment
offered to charities and their European counterparts. For
a European Foundation, this barrier is removed – only one
organisation is required, and the tax treatment given to the
organisation is the same as any other charity in the country in
which the charity is operating. For example, a UK based charity
that has activities in England, France and Germany would have
the tax breaks afforded to UK charities automatically applied to
the English activities and donations from English supporters, the
French equivalent to the activities in France, and so on.
The Foundation will be a separate legal entity, capable of legal
personality (as with a UK company), and the directors/trustees
will have limited liability. To be eligible, an organisation must
have activities or a stated objective of carrying out activities in
more than one Member State, and the Regulations provide for
conversion and merger as well as the creation of new entities.
The Regulation itself covers the detail of the Foundation,
including its structure, how to register, and some detail as to
how to amend governing documents and dissolve. Member
States will have to designate a registry, and this registry will
deal with regulation of entities operating in their Member State.
An interesting use of language in the Regulation as currently
drafted means that a Foundation that provides the appropriate
documentation shall be registered within a certain timeframe,
which may require swift decisions on whether something is
charitable.
At present, the Regulations are only in draft form, and they need
to be formally passed through the European system – much
like the passage of a Bill through the UK parliament before it
becomes an Act and therefore law. How long this takes depends
upon the number of amendments submitted and considered,
but if there is little amendment to the text, the Regulation
could be in force within 15 months. There has been much
public support for the establishment of the Foundation within
the European Union, and so provided the practical details are
acceptable, we may see the implementation of this new legal
entity by September next year.
We will, of course, update you as and when the Foundation
does come into being, but in the meantime, if you currently
have activities in more than one Member State, it may be worth
considering the proposed regulation, and potential conversion
to a Foundation in due course.
If you have any questions about the European Foundation,
please contact Vicki Bowles at [email protected]
Vicki [email protected]
Permanent endowment changes – continued
The Royal Society is the national academy of science for
the UK. We recognise, promote, and support excellence in
science, encouraging the development and use of science
for the benefit of humanity.
The Society was founded in 1660 with the same ethos and
goals that we have today. Stone King are helping us to ensure
that our Royal Charter, which dates back to the 1670’s, allows
us to maintain our position as the UK’s leading scientific
champion.
The Society has played a part in some of the most
significant and life-changing discoveries in scientific
history. Royal Society scientists, including over 80 Nobel
laureates, continue to make
outstanding contributions
to science in many research
areas.
Among other act iv i t ies ,
t h e S o c i e t y i d e n t i f i e s
and supports the work of
outstanding scientists in the
UK, whether they are in the
early stages of their career or
are already established. We
also support other countries who are building their scientific
strength, particularly in Africa.
Bringing science to new audiences is another goal, with
events such as our Summer Science Exhibition, the Royal
Society Winton Prize for Science Books and online resources
such as Trailblazing, an interactive timeline of the world
changing and sometimes quirky science published in our
journals over the last 350 years.
Science is also vital to many areas of government policy
making and the Society seeks to ensure the government and
the public have access to impartial and independent expert
advice to inform debate and guide good decision making.
Client Focus – The Royal Society
Regular readers of Spotlight will be aware that HMRC introduced
a new “management condition” into its definition of charity in
April 2010 for charities claiming Gift Aid. Charities had to be in
a position to show that they were satisfied that all persons who
held a management position (including executives, trustees
and senior employees who had some control over day to day
management and use of assets) were “fit and proper” before
making any Gift Aid claim.
As hinted at in the previous edition, HMRC have now extended
this definition to all charitable tax reliefs, so any application
made for any tax relief by a charity after April 2012 can only be
made if the charity is satisfied that it meets the new test.
For the vast majority of charities, practically, this poses no real
issue. Charities should have in place methods of ensuring that
individuals who are working with and for them are appropriate,
HMRC extends own definition of charity to all tax reliefs
s
s
News in briefCharities Act 2011 in force On the 14th March, the Charities Act 2011 came into force,
consolidating the Charities Acts 1993, 2006 and the Recreational
Charities Act 1958. As you will be aware, this does not create
new law, but merely puts most of the existing law in one place.
The main issue for charities, is that all the previous sections
numbers are now defunct, and for documents created post the
14th March, the new 2011 numbers must be used.
Benevolent funds keep charitable status As predicted by most of the sector, the Tribunal has ruled that
benevolent funds can keep their restricted beneficiary class, and
still be charitable. Although hailed by some as a waste of time
and costs, the decision does bring some legal certainty, which
is welcomed if only by lawyers! The Tribunal could, perhaps,
have gone further in deciding why the restricted beneficiary
class exemption exists for charities for the relief and prevention
of poverty, since doing so could have provided some useful
guidance in indirect benefits, but they declined to do this.
(taking references from previous employers, for example), and
so, if called upon, the charity could show that as far as they were
aware, all individuals were “fit and proper” people to be working
for a charity. If you want to be extra cautious, then ask trustees
and senior staff to fill out and sign HMRC’s model declaration
(available at http://www.hmrc.gov.uk/charities/tax/recognition.
htm#6), but this is by no means a requirement, and you would
still have to take account of any information that comes to light
after the declaration has been signed.
It is, of course, hugely unhelpful to the sector as a whole to
have to deal with two definitions of charity, but HMRC do
not appear to see it this way. Whilst the definition is in force,
charities will need to ensure that they comply, and the model
declaration is the simplest way to show HMRC that you have
complied. Bear in mind though, that the only time you will
actually need to have evidence of this, is in the unlikely event of
an HMRC investigation. If being investigated, you would need
to have evidence that you were satisfied that the management
condition was met, but there is no requirement to use the model
declaration – or any other form of declaration. HMRC also do not
require charities to confirm to them on a regular basis that they
meet the definition. The only time this will become an issue, is
in the unlikely event of an investigation.
For new charities, the new definition appears to exclude the
possibility of claiming Gift Aid in the period before the charity
is entered on the register. Legally, registration with the Charity
Commission does not confer charitable status – it merely
recognises it – but this is a common misconception, and once
to which HMRC appear to subscribe. Registration with the
Commission only comes into play when a charity meets the
income threshold of £5,000, and there are a number of excepted
charities – such as Academies – but these organisations are
still charities under the law of England and Wales, and they
should be entitled to the same tax reliefs as the charities on the
register. Whether it will be the case post April 2012 that charities
cannot claim Gift Aid for the period before registration remains
to be seen, but hopefully HMRC will continue with the previous
arrangement.
This new regulation appears to have taken the Charity
Commission by surprise, going against the principles of joined
up government in this connection. However, it should be noted
that HMRC is now charged with allowing tax reliefs to more
than UK charities, and it may be this difficulty that is driving
these changes.
If you have questions about the new definition and the
application of the test, please get in contact with your usual
contact at Stone King, or speak with your accountant.
Article written by Michael King and Vicki Bowles
Michael King Partner [email protected]
Vicki Bowles Barrister [email protected]
“However, it should be noted that HMRC is now charged with allowing tax reliefs to more than UK charities, and it may be this difficulty that is driving these changes.”
VAT decisions – donations v consideration Two recent VAT decisions have considered income of a charity,
and whether it was a pure donation, or consideration for a
supply.
Three Counties Dog Rescue concerned the “donation” requested
by the charity when a dog was adopted. The charity argued that
the term “donation” was used more for PR purposes than to
describe the actual income, as members of the public were more
used to seeing the term donation used. On the facts, there was a
minimum amount specified, and the Tribunal found that it was
consideration for the supply of the dog, rather than a gift. This
was important for the charity, as the sale of donated goods (such
as the dogs) is subject to the zero rate of VAT, and this ruling
allows the charity to reclaim its input tax, without having to pay
any VAT on the donation to HMRC.
The reverse was being argued in the Aberdeen Sports Village
(ASV) case. Aberdeen Sports Village (ASV) was set up as a joint
venture between Aberdeen County Council and Aberdeen
University. Each party paid the Sports Village an “annual
grant payment” to cover shortfalls as part of the joint venture
agreement, which also placed certain obligations on ASV in
terms of discounts offered, and preferential treatment for
Aberdeen University students. The taxpayer claimed that this
was a donation in the sense of a gift, and therefore not subject
to VAT. The Tribunal disagreed, and found that the degree of
control exercised over the activities of ASV meant that the
payment was consideration for the supply of certain services
to the Council and the University (including discounts given to
Council employees and students). Again – the description of the
payment was irrelevant – the Tribunal looked at the substance
of the transaction to decide how the payment should be treated.
These cases highlight the complexities of VAT, and when
consideration is consideration for VAT purposes is not always
straightforward. Specialist VAT advice is always recommended
when looking at tax arrangements.
Gift Aid updated guidance HMRC have also issued updated guidance on Gift Aid, which
makes changes to the explanations required to donors in
relation to the maximum amount of relief that can be claimed,
and corrects a mistake about the length of time records should
be kept in the previous guidance. The previous guidance stated
that records needed to be kept for four years, but the correct
period is six years.
The new guidance is available on the HMRC website,
and charities have until 31st December to amend Gift Aid
declarations, but to ensure old copies are not in circulation
after that date, we recommend making the changes as soon
as possible.
Tax relief cap to go? When the Chancellor announced the proposed cap on the
amount of tax relief that could be claimed by donors on
donations to charity in the recent budget, I doubt that he
realised the uproar it would cause in the sector.
In a heartening show of solidarity, charities and sector
spokespeople have worked together to lobby the government to
change their minds on the proposal. At the time of writing, David
Cameron has announced that he will “listen to the concerns
raised”, but it remains to be seen what the final outcome will be.
Stone King Website Breaking news stories can often be found on the Stone King
website homepage. Recent articles include a note on the
benevolent funds judgment mentioned above, and a note about
the risks to charities of cloud computing.
Vicki [email protected]
News in brief – continued
Your Contacts
The Spotlight deals with some current legal topics. It should not be used as an alternative to specific legal advice on the individual circumstances of a particular problem. Stone King LLP - registered limited liability partnership no OC315280, registered office 13 Queen Square, Bath BA1 2HJ
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